It costs $60 of variable and $40 of fixed costs to produce rocking chair which normally sells for $150. A wholesaler offers to purchase 5,000 rocking chairs at $125 each. Georgia would incur special shipping costs of $10 per rocking chair if the order were accepted. Georgia has sufficient unused capacity to produce the 5,000 rocking chairs. If the special order is accepted, what will be the effect on net income?

Question

Business

Craig Villa

27 August, 16:25

It costs $60 of variable and $40 of fixed costs to produce rocking chair which normally sells for $150. A wholesaler offers to purchase 5,000 rocking chairs at $125 each. Georgia would incur special shipping costs of $10 per rocking chair if the order were accepted. Georgia has sufficient unused capacity to produce the 5,000 rocking chairs. If the special order is accepted, what will be the effect on net income?

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Justice Travis · Answer 1

Total effect on income = $275,000

Explanation:

Giving the following information:

It costs $60 of variable and $40 of fixed costs to produce a rocking chair which normally sells for $150. A wholesaler offers to purchase 5,000 rocking chairs at $125 each. Georgia would incur special shipping costs of $10 per rocking chair if the order were accepted. Georgia has sufficient unused capacity to produce the 5,000 rocking chairs.

Because it is a special offer and there is unused capacity, we will not have into account the fixed costs.

Unitary variable costs = 60 + 10 = 70

Contribution margin = 125 - 70 = 55

Total effect on income = 5,000*55 = $275,000